SOUTH AFRICA: First among equals

26/05/2010
| Michael Bleby

South Africa’s liberal economic policies are increasingly being called into question in the wake of recession and amid rising inequality. The path the nation chooses will have a profound impact on its economic development

South Africa may have emerged from recession, but its recovery has been patchy. Business figures such as Gidon Novick, the man behind Kulula Air, the countrys low-cost airline, see an improvement in the economy  but only a modest one. Weve seen a turnaround in terms of [the economic fortunes of] corporates, he says to Emerging Markets. Theyre less frightened and conservative than they were a year ago, but have we seen a massive turnaround? We havent.

His caution is borne out by the numbers, which show that while South Africa has emerged from the global recession, it has yet to return to its past highs. After its first recession in 16 years, Africas largest economy crept back into growth with an annualized rate of 0.9% in the third quarter and 3.2% in the fourth quarter of last year.

South Africa has much to be thankful for: it has skirted around the edges of the global economic crisis; the countrys banks, in the main, avoided the US-led subprime craze that brought many institutions to their knees; currency controls prevented crisis-induced capital flight; a renewed Chinese appetite is keeping mineral exports healthy.

But the economy has yet to recover fully. Consumers, whose spending makes up over 60% of gross domestic product, have not yet shaken off their malaise, and no full recovery is expected until next year.

But in a development that may have profound implications for the economy and the countrys development, debate has flared up about the liberal economic policy course South Africa has charted since Nelson Mandelas presidency (even though then vice-president Thabo Mbeki was largely steering the ship).

In contrast to the tight grip on policy Mbeki held as president, giving little room for questioning, president Jacob Zuma shows little firm direction, and at times it seems as if the ground is shifting.

A new cabinet post under Zuma is minister for economic development, now occupied by former trade unionist Ebrahim Patel. How much influence over policy Patel will have is as yet unclear. The ANCs Youth League faction, led by populist Julius Malema, has been calling for the countrys mines to be nationalized. Officials and cabinet ministers respond that nationalization is not government or ANC policy, but Malemas continued lobbying for it to become policy leaves many uneasy.

In his February budget speech, finance minister Pravin Gordhan reaffirmed the inflation-targeting focus of the South African Reserve Banks mandate, but within days said he had given the bank a new and expanded mandate to take into account the concerns of the labour federation Cosatu about job creation and growth.

Analysts say there were no substantive changes to the policy, which already allowed the bank a level of flexibility. But the seeds of doubt have been sown.

DIRECTION SOUGHT

Does any of this mean the country is losing its way? A country has a choice of policies to drive economic development, but it needs to choose one and stick to it, says Nick Binedell, director of the Johannesburg-based Gordon Institute of Business Science (Gibs) business school.

That might be China being led by the Chinese Communist Party or the US being led by democracy and competition, he says. But whatever one you have, youd better execute it well. That is not happening in South Africa, he says. Weve lost momentum.

Others are not so worried. Theres a lot of noise, a lot of positioning, but the policies are sound, says Novick. Were not really concerned about the government changing tack and being taken over by Communists or something like that. We see a very high level of awareness around economic growth.

But it may not be that clear cut. Goolam Ballim, group economist for Standard Bank, the countrys largest bank, says South Africa will continue to question its economic policies for a long time to come. We will remain on a perpetual hunt for a robust and transcending economic solution, given the very deep and pervasive deficits that prevail, be it in income, assets, skills and so forth, Ballim says.

Its not surprising when the economy stutters as profoundly as it has that the clamour for more activism in policy and more targeted and aggressive policy outcomes can be harnessed.

The current open disagreements over policy may, in fact, be an indicator of progress the country has made, Ballim says. Of the Mbeki era, you could also argue South Africa was not really privy to enormous flexibility in policy choices because of the precarious economic and financial conditions, whereas today there is a more robust dynamic, and the underlying strength of the foundation in economy does open up space for a diverse set of ideas and a greater sense of activism from all manner of public and private society.

RISING INEQUALITIES

How economic policy develops will be crucial to the welfare of the poor majority of this nation of nearly 50 million. It is also crucial that the machinery of state improves its ability to put its resources to the benefit of people. The performance of state-run schools in poor areas is dismal, with politically powerful teachers unions hostile to attempts to sack or discipline lazy or incompetent teachers.

Inequality is increasing. Between 1993 and 2008 the mean per capita annual income of the poorest fifth of the population rose 28% to R1,485. Over the same time, the average income of the richest fifth rose 37% to R64,565. While over 90% of residents in a city like Johannesburg have access to water, electricity, sanitation and waste removal, in a rural municipality such as Alfred Nzo in the Eastern Cape, the proportion shrivels to less than half.

This unchecked inequality poses a bigger risk to the countrys long-term future than the recent high-profile apparent racial instability resulting from the murder on April 3 of right-wing extremist Eugene TerreBlanche or ANC youth leader Malemas provocative singing (until ordered to stop by his political bosses) of an ANC struggle song with the words kill the Boer.

Rather, it is the growing ranks of poorly educated, unemployed and unemployable young black people  the constituency Malema directly appeals to  that pose the greatest risk to the countrys stability.

The number of economically inactive people between 15 and 24 in age  those neither employed nor unemployed in the formal definition, which presupposes an intention to find work  jumped 5.1% to 7.4 million in the last quarter of 2009 from a year earlier.

Without significant liberalization, South Africa will not grow fast enough to raise overall welfare levels, says Frans Cronje, deputy chief executive of the South African Institute of Race Relations, a think tank. In an analysis published last year, Cronje said a failure to reform education, labour or race-based affirmative action policies, along with a more interventionist, higher-taxing and deficit-borrowing government, would ensure an annual growth rate of no more than 3%.

Assuming such a growth rate to 2030, mean per capita annual real income would rise from R25,950 in 2008 to R39,950. This, Cronje says may well be a case of too little too late to prevent social instability from further compromising the growth potential of the country.

If, by contrast, the government ended union dominance, particularly in education, eased labour market regulations and changed the current focus on race-based affirmative action to one of opportunity for all disadvantaged people, growth rates of 6%, or even 8% would be possible, Cronje says.

Annual growth of 6% leading to a per capita annual income of R75,135 by 2030 would move South Africa on to a clear middle-class income trajectory, Cronje says. At 8% and a R113,360 income, the country would become a predominantly middle-class society within a generation.

Still, that is unlikely. The post-war economy has never reached that, touching only as high as 7.9% in 1964, 6.6% in 1980 and 5.6% in 2006  its highest since democracy.

Another concern is corruption, symbolized perhaps in the ANCs equity stake in Hitachi Power Africa, a company that won a R20 billion state contract to build boilers for a new coal-fired power station. Political fights are increasingly seen as struggles for access to procurement and tender decisions. Corruption is deeply corrosive to economic growth and employment creation, Ballim says. Novick ranks it as the biggest risk the country faces. If it gets out of control, then we dont have a country, he says.

drawcards

South Africa may yet be lucky. With the world economic crisis subsiding, attention is again turning towards Africa as the next global growth market. Resources such as oil and iron ore are drawcards, but so are the growing continental demands for telecommunications and financial services.

In February, Russian investment bank Renaissance Capital opened an office in Johannesburg  in addition to those it already has in Nigeria, Kenya, Zambia, Zimbabwe and Ghana  to help it reach further into the rest of the continent.

South Africa is soon to host the 2010 Fifa soccer World Cup. This is unlikely to bring the massive boost of tourist revenues many had expected it to be. The global downturn, the negative publicity around the TerreBlanche murder, widely publicized public-sector worker strikes, and fears of crime have lowered the likely number of foreign visitors from an initially expected 450,000.

It will still be a massive event, however. Even if we get 300,000, its much bigger than weve had at any one point in time, Novick says.

Separately, inflation is coming under control and is likely to stick around 5.5% this year and next  within the prescribed 3% to 6% band. As a consequence, expected nominal wage growth of 9% will mean reasonably healthy real wage gains, says Ballim.

Finance minister Gordhan, briefing parliament in April, indicated he may raise his February forecasts of 2.3% growth this year and 3.2% next year. So its not inconceivable that by the end of the year, the South African consumer could be helping propel the economy along once more.

President Petro Poroshenko and premier Arseniy Yatsenyuk have dipped into Georgia’s deep pool of reformist talent in an effort to rebuild Ukraine’s war-ravaged economy. However, even with a vast IMF package and other financial assistance, many have trouble seeing how Ukraine is ever going to return to growth while it is in conflict with the Russia-backed rebels in the east